How Would You Solve Too Smart’s Dilemma?

I met several new bloggers by hosting the 130th Festival of Frugality on Tuesday and one of the bloggers I met was not only new to me, but he’s new to blogging. Too Smart to Live Like This [post archived at the Internet Archive] wrote yesterday prompted by a post of Paid Twice’s post What’s Your Life-Changing Money? and realized that his life-changing number was $3600. He reasoned if he could pay off two loans that would enable him free up an additional $900/month.

I started thinking about the various factors of solving this problem. First off, I don’t know all the details. One factor is that Too Smart got into a vicious cycle by needing to take a Payroll Advance loan. I’m assuming this is one of the places that charges your arm and leg for interest for the money you’ve been “advanced”. I am assuming the $600 is monthly interest he has to make on the Payroll Advance loan – he does say if he could pay back the $2000 he’d have $600 more a month. (If you visit, Too Smart, be sure to let me know if I’ve guessed wrong). Ouch, ouch, ouch. This kind of hurts to really think about it too much. It looks like Too Smart is paying 30% interest on that $2000. But maybe it’s only 25%. Let’s say it’s only 25%. I know those places are sharks, but they gotta have some mercy.

He also owes $1600 to a friend and he’s paying it back at $300/month. Hopefully that loan is interest free.

So without knowing all the details and just making some guesses… here is what I calculated.

Okay, let’s say if he could get $3600 somehow, right now, he could pay off the $2000 and eliminate the Payroll Advance loan’s $600 interest each month. He could also pay off the friend and eliminate the $300. So he’s freed up $900, but where’d the $3600 come from? Perhaps his employer? His father or mother-in-law? If someone was kind enough to loan him the money, interest, he could set up a balance transfer of $900 per month (like he did for his buddy) and apply it toward that debt faithfully until it’s repaid. That would take four months. Let me say that again.

FOUR MONTHS TO PAY OFF $3600 DEBT

Now, let’s say he continues on as he has been. But for simplicity’s sake let’s say he increases the friend’s payment to $320/month so this loan is gone in exactly five months. But he’s also rolling over the Payroll Advance loan and still paying interest every month.

Oh, I couldn’t stand figuring it out word for word any longer and opened up Excel and started plunking in numbers. This is what I came up with – you’ll have to click on it to see it unless you have a really big screen or magnification, or let’s face it, really good vision. I calculated if Too Smart is paying 25% interest, and stays steady as he has been with these payments, makes an accelerated payment using the $320 he was paying the friend toward the Payroll Advance loan in December, he will be done in January, and will have paid a total of $6212.65.

$2000 for the original Payroll Advance loan, $1600 to the friend, and $2612.65 in interest.

So, $3600 in four months, vs. $6212.65 over 7 months.

Too Smart – is there any way you can beg or borrow that $3600? Do you know ANYONE who could loan you $3600 for four months interest free? I remember reading you are in a bad situation financially, is your credit completely shot? I know credit cards are the wrong answer, but if you could get one with 0% interest, or even at 1% interest, you could still have the $3600 paid off in four months. As opposed to seven months, and an additional $2612 in interest.

Is there anything you own worth $3600 you could sell? Then you’d be free and clear immediately. Would the $900 then become free and clear to apply to your debt?

Could you take on a part-time job for a few weeks to accelerate the payment schedule?

At any rate, if Too Smart can’t come up with the money or accelerate payments, this debt will come to an end in January (assuming the interest is 25%).

What would you do if you were Too Smart?

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4 thoughts on “How Would You Solve Too Smart’s Dilemma?

  1. Mrs. Accountability,

    Thanks for your dissection. For the most part, it’s spot on.

    I’ve just added a post specifically about the payroll advance system and how bad it is, Payroll Advance: Hitting Rock Bottom [archived at the Internet Archive].

    The numbers work out as three Payroll Advance companies totalling about $2000. Every two weeks we have to flip these to new checks, paying, on average, about $100 per. That works out to about $600/mo, and is much, much higher than your 30%. Closer to 400%.

    The loan from my friend was, embarrassingly, to pay off the payroll people, which we did, and got sucked back in. I pay that at $150 per paycheck, direct deposited to his checking account.

    It’s not interest free, because I wouldn’t take that (Pride is a sin, isn’t it?) but it’s pretty low interest, and it was a calculated one time addition to the balance, it’s not something that compounds.

    As you can imagine, my credit is shot. No, that’s not the right word. My credit report reads like a rap sheet. I have the distinction of collecting money from a car dealer on one of their “We can get you financing or we’ll pay you $50.” deals.

    As I say in the piece above, I’ve spent my whole life moneystupid, letting my friends and family bail me out of jam after jam. I doubt any would be open to that anymore. I don’t blame them. This is something I have to fix… organically.

    The key to this, for me, is to lower the amount of each check as we flip. $800 becomes $750, etc. Ohio recently passed a law where the amount you can borrow cannot increase from the last transaction. By lowering the amounts we would have the benefit of slowly closing the door to future problems.

    Payroll Advance is usury at its worst. It really is the rock bottom of moneystupid. Hopefully one day, when I’m out of the trap, someone will find my post in Google before they choose to go down that path.

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  2. Wow! Those people are evil. Almost as evil as the regulators and legislators who deep-sixed usury laws that used to keep a lid on this kind of thing.

    Guess if I were TSTLLT, I’d try to get a person-to-person loan at one of the PTP online sites. Whatever it cost, it sure couldn’t be 400%.

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  3. @Too Smart – thank you for posting and thank you for your elaborative post. Even now if someone reads your post hopefully they will find some other way than to use one of these companies.

    @Funny – I agree!! Thanks for your comment and suggestion.

    [Reply]

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